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Finance and secured lending in Italy

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Trends and regulatory climate

TrendsWhat is the current state of the lending market in your jurisdiction and have any new trends emerged over the last 12 months?
In order to increase Italian competitiveness during the recession, the government passed new laws in recent years making significant revisions to the security regime, permitting non-listed companies to access bond financings and making it easier for Italian companies to access the capital markets, including by way of private placements.

Most recently, the Council of Ministers enacted Decree 59/ 2016, which introduced:

a new security consisting of a non-possessory pledge (similar to a floating charge);

a new conditional security assignment agreement (‘patto marciano’ agreement), which permits out-of-court appropriation by lenders of real estate assets used as collateral to secure financings (thus circumventing the slow and cumbersome court sale procedure which has hitherto made enforcement over real estate so unwieldy), and quicker and more efficient enforcement and insolvency proceedings.

Regulatory activityIs secured lending a regulated activity in your jurisdiction?
Yes – under the Banking Act (Legislative Decree 385/1993), lending to the public is a regulated activity which may be carried out only by banks and financial intermediaries that have been authorised by and registered with the Bank of Italy. Additionally, the EU passporting regime set out in the EU Capital Requirements Directive (2013/36/EU) permits a bank that is regulated in one EU member state to carry out all banking activities recognised under the directive in other EU member states (the passporting regime does not cover unregulated lenders or investment firms that wish to undertake lending activities in Italy on a cross-border basis). Bank loan financings may therefore be offered only by regulated Italian banks and financial intermediaries, or EU banks and financial intermediaries with a lending passport.

However, recent changes to the regulatory and tax framework have been implemented to give Italian companies new financing alternatives to the traditional bank financing model, so that insurers, Italian securitisation vehicles (ie, companies established pursuant to the Italian Securitisation Law) and alternative investment funds may also now engage in direct lending to Italian borrowers. Further, EU alternative investment funds may lend directly into Italy by passporting their Alternative Investment Fund Managers Directive licence in Italy.

Are there any specific regulatory issues which a prospective borrower should consider when arranging or entering into a secured loan facility?
Yes – under the Banking Act (Legislative Decree 385/1993), lending to the public is a regulated activity which may be carried out only by banks and financial intermediaries that have been authorised by and registered with the Bank of Italy. Additionally, the EU passporting regime set out in the EU Capital Requirements Directive (2013/36/EU) permits a bank that is regulated in one EU member state to carry out all banking activities recognised under the directive in other EU member states (the passporting regime does not cover unregulated lenders or investment firms that wish to undertake lending activities in Italy on a cross-border basis). Bank loan financings may therefore be offered only by regulated Italian banks and financial intermediaries, or EU banks and financial intermediaries with a lending passport.

However, recent changes to the regulatory and tax framework have been implemented to give Italian companies new financing alternatives to the traditional bank financing model, so that insurers, Italian securitisation vehicles (ie, companies established pursuant to the Italian Securitisation Law) and alternative investment funds may also now engage in direct lending to Italian borrowers. Further, EU alternative investment funds may lend directly into Italy by passporting their Alternative Investment Fund Managers Directive licence in Italy.

Are there any specific regulatory issues which a prospective lender should consider when arranging or entering into a secured loan facility?
Yes – under the Banking Act (Legislative Decree 385/1993), lending to the public is a regulated activity which may be carried out only by banks and financial intermediaries that have been authorised by and registered with the Bank of Italy. Additionally, the EU passporting regime set out in the EU Capital Requirements Directive (2013/36/EU) permits a bank that is regulated in one EU member state to carry out all banking activities recognised under the directive in other EU member states (the passporting regime does not cover unregulated lenders or investment firms that wish to undertake lending activities in Italy on a cross-border basis). Bank loan financings may therefore be offered only by regulated Italian banks and financial intermediaries, or EU banks and financial intermediaries with a lending passport.

However, recent changes to the regulatory and tax framework have been implemented to give Italian companies new financing alternatives to the traditional bank financing model, so that insurers, Italian securitisation vehicles (ie, companies established pursuant to the Italian Securitisation Law) and alternative investment funds may also now engage in direct lending to Italian borrowers. Further, EU alternative investment funds may lend directly into Italy by passporting their Alternative Investment Fund Managers Directive licence in Italy.

Are there plans or proposals for reform or significant changes to the regulatory landscape in this area?
No.

Structuring a lending transaction

GeneralWho are the active providers of secured finance in your jurisdiction (eg, international banks, local banks or non-bank financial institutions)?

International banks, local banks and non-bank financial institutions that are authorised to lend in Italy.

How are syndicated facilities normally structured? Does the law in your jurisdiction allow a facility agent to be appointed to act on behalf of other banking syndicate members?
In the case of syndicated loans, an agent may be appointed to enforce rights on behalf of the participating banks. However, all security interests must still be granted in favour of each syndicate bank (including on the transfer of a participation to a new lender). If the agent’s role includes activities that are regulated in Italy (eg, accepting deposits, arranging deals in investments, advising on investments, dealing in investments as a principal or agent, safeguarding and administering investments or managing investments), then the agent must also be regulated. There is a risk of a conflict of interest if the agent acts as a security agent for more than one group of creditors, or is both security agent and a creditor; accordingly, the agent must have Chinese walls in place so that information it receives as a creditor is kept separate from information it receives as an agent.

Does the law in your jurisdiction allow security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate?
Trusts are not regulated under Italian law, but trusts governed by a foreign law should be recognised by the Italian courts in accordance with the Hague Convention 1985. Trustees can be either Italian resident entities or foreign entities operating in Italy. Both have fiduciary duties governed by the foreign law applicable to the trust. However, the agent concept is recognised under Italian law so that in syndicated loans governed by Italian law, a bank commonly acts as an agent for the other lenders instead of acting as trustee.

Special purpose vehicle financingIs it common in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed? Would security generally be given over the shares in the SPV or would lenders require direct asset security?
SPVs are commonly used in structured finance transactions; less so in more vanilla secured financings. Typically, a mixture of security is given, depending on the underlying assets and the type of financing.

InterestIs interest most commonly calculated by reference to a bank base rate or a market standard variable reference rate (eg, LIBOR, EURIBOR or HIBOR)? If the latter, which is the most commonly used reference rate in your jurisdiction?
Interest is most commonly calculated by reference to EURIBOR.

Are there any regulatory restrictions on the rate of interest that can be charged on bank loans?
Interest can be charged on bank loans within certain limits, calculated on the basis of the average market rates charged for similar transactions, as published quarterly by the Ministry of Economy in agreement with the Bank of Italy and the Italian Exchange Office. Pursuant to the Usury Law (108/1996), rates that exceed the average market rate by 25% plus 400 basis points (or that exceed the average market rate by 800 basis points) are deemed to be usurious. Contractual provisions providing for usurious rates are null and void and borrowing money at a rate above such thresholds is a criminal offence.

Use and creation of guaranteesAre guarantees used in your jurisdiction?
Yes – guarantees and collateral support are typically given by parent companies, sister companies and subsidiaries in Italian secured financings.

What is the procedure for their creation?
Guarantees should be in writing and be permitted in the grantor’s constitutional documents.

Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)?
In principle, guarantees may be granted if:

grant is permitted by the articles of association of the relevant company.

The directors of an Italian company are under a duty to promote the success of that company only, and not that of any group of which the company is a part; accordingly, it may not be possible to show a corporate benefit from providing an upstream or cross-stream guarantee. The existence of the benefit (direct or indirect) to the company is a matter of fact (not law) to be addressed and evaluated by the directors on a case-by-case basis. The directors must therefore carefully analyse a transaction to determine the overall benefit to the company. If the parent company acts in violation of fair corporate and business management of other group companies, it may be held liable to the shareholders and creditors of those companies for damages for unfair direction and coordination activities. A maximum guaranteed cap should be agreed, which should never be an amount that would make the company technically insolvent.

A guarantor may object to enforcement of the guarantee in the absence of default by the debtor of the guaranteed obligations or raise any other objection, which the debtor is entitled to oppose against the guaranteed creditor. Such defences are waived in the case of grant of a first demand autonomous guarantee, in which event the guarantor is entitled to claim only that the guarantee has been enforced fraudulently.

Subordination and priorityDescribe the most common methods of structuring the priority of debts and security.
Contractual subordination of debt is permitted under Italian law and is particularly common in relation to syndicated loans and securitisation transactions. In practice, this can be achieved through an intercreditor agreement, although clauses governing subordination may be disregarded by a receiver in an insolvency scenario. Structural subordination is possible under Italian law and is often used in acquisition finance transactions where junior facilities are made available to a holding company and senior facilities are made available to an acquisition vehicle or, following the acquisition, the target.

Documentary taxes and stamp dutyAre any taxes, stamp duty or other fees payable on the granting of a loan, guarantee or security interest, or on its enforcement?
Registration taxes can be substantial and cumulative, unless the parties opt for the substitutive tax regime, under which a flat-rate tax at 0.25% is levied on the entire transaction, irrespective of the number of securities to be registered.

If no substitutive tax regime is available, registration taxes are applicable as follows:

Guarantees – these are not generally subject to mandatory registration with the Italian tax authorities. When filed for registration with the tax authorities, registration tax applies at a rate of 0.5% on the amount of the secured obligations.

Special liens, mortgages, pledges over quotas and shares, and pledges over receivables – the rate of the registration tax depends on whether the security interest secures the security provider’s own obligations or those of a third party. If the security secures the security provider’s own obligations, a flat-rate registration tax is generally payable in the amount of €200. Otherwise, registration tax applies at a rate of 0.5% on the amount of the secured obligations (or, with respect to quotas/shares, the lower between such amount and the value of such quotas/shares).

Assignment of receivables by way of security – in principle, this is always subject to registration tax at a rate of 0.5% calculated on the nominal value of the receivables assigned.

Mortgage tax – a mortgage over property is subject to mortgage tax at a rate of 2% on the secured amount (a 0.5% proportional rate charge may apply on cancellation of the mortgage). Mortgage tax applies in addition to the registration tax mentioned above.

Stamp duty tax – in case of filing (voluntary or mandatory) with the Italian tax authorities, guarantees and security interests are subject to stamp duty tax. The tax ordinarily amounts to €16 for every four pages or 100 lines of the document.

On enforcement, registration tax will be payable at a rate ranging from €200 to a 3% proportional rate. Additionally, legal proceedings of a civil, administrative or tax nature are subject to a special stamp duty called ‘contributo unificato di iscrizione a ruolo’, which varies depending on the value and type of the proceedings.

Cross-border lending

Governing lawIs it more common for local law to govern the terms of the facility documentation or is the law of another jurisdiction often elected by the parties (eg, English law or New York law)?
Domestic transactions are predominantly governed by Italian law. Cross-border transactions are commonly governed by English law, as it facilitates syndication; accordingly, the facility agreement and any guarantee will be governed by English law. Some security in Italy must be governed by Italian law as a matter of public policy, such as mortgages and certain pledges and liens; in principle, these securities must also be registered in order to be enforceable.

RestrictionsAre there any restrictions on the making of loans by foreign lenders or the granting of security or guarantees to foreign lenders?
Yes – under the Banking Act (Legislative Decree 385/1993), lending to the public is a regulated activity which may be carried out only by banks and financial intermediaries that have been authorised by and registered with the Bank of Italy. Additionally, the EU passporting regime set out in the EU Capital Requirements Directive (2013/36/EU) permits a bank that is regulated in one EU member state to carry out all banking activities recognised under the directive in other EU member states (the passporting regime does not cover unregulated lenders or investment firms that wish to undertake lending activities in Italy on a cross-border basis). Bank loan financings may therefore be offered only by regulated Italian banks and financial intermediaries, or EU banks and financial intermediaries with a lending passport.

However, recent changes to the regulatory and tax framework have been implemented to give Italian companies new financing alternatives to the traditional bank financing model, so that insurers, Italian securitisation vehicles (ie, companies established pursuant to the Italian Securitisation Law) and alternative investment funds may also now engage in direct lending to Italian borrowers. Further, EU alternative investment funds may lend directly into Italy by passporting their Alternative Investment Fund Managers Directive licence in Italy.

Are there any exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?
No. However, interest payments to a foreign lender may be subject to withholding tax unless reduced by an applicable double tax treaty. Restrictions may also apply with respect to transactions involving specific countries (eg, countries with respect to which international sanctions apply). Funds held outside Italy or repatriated to Italy without a bank intermediary must be declared for tax purposes.

Security – general

Security agreementsIs it possible to create a security interest over all assets of an entity? If so, would a single security agreement suffice or is a separate agreement required for each type of asset?
In principle, security may be granted over all assets of an entity. English-style floating charges are not available under Italian law over all assets, so separate security is required for each available collateral, each of which is governed by a separate set of statutory rules relating to creation, perfection, registration and enforcement. The following assets are commonly pledged or mortgaged to secure bank loan financings:

a new security consisting of a non-possessory pledge (similar to a floating charge) over certain moveable assets (existing and future) and credits used for business purposes (ie, machinery/raw materials); and

a new conditional security assignment agreement (‘patto marciano’ agreement), which permits out-of-court appropriation by lenders of real estate assets used as collateral to secure financings.

Release of securityWhat are the formalities for releasing security over the most common forms of assets?
A deed of release should be entered into between the secured creditor and the debtor to confirm the release of a security over the debtor’s assets. Alternatively, a unilateral release may be executed by the secured creditor. The sale of a collateral asset that is subject to a security interest does not trigger release of the security without the consent of the secured creditor.

Asset classes used as collateral for security

Real estateCan security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure?
Yes – real estate assets may be mortgaged to secure a bank loan financing. The mortgage must be granted in writing (notarial deed) and must be registered in the relevant land register. Additionally, Decree 59/2016 introduced a new conditional security assignment agreement security (the ‘patto marciano’ agreement) which must be granted in writing (notarial deed); this has significantly reduced enforcement times and burdens.

Machinery and equipmentCan security be granted over machinery and equipment? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes – moveable assets registered with public registries (eg, aircraft, ships, cars) may be mortgaged to secure bank loan financings. The mortgage must be granted in writing (notarial deed) and must be registered in the relevant asset register. Certain types of asset may be secured by a special lien under Article 46 of the Banking Act to secure debt claims granted by banks under medium or long-term facilities and/or bonds (ie, those with a term of more than 18 months). The lien must be granted in writing (notarial deed). Pledges may also be created over machinery and equipment. Additionally, Decree 59/2016 introduced a new security consisting of a non-possessory pledge (similar to a floating charge) over certain moveable assets (existing and future) and credits used for business purposes (ie, machinery/raw materials), for which no dispossession is required. The pledge must be granted in writing.

ReceivablesCan security be granted over receivables? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes – trade receivables and inter-company receivables can be pledged or assigned by way of security. The pledge or assignment must be granted in writing and the pledge or assignment must be notified to the relevant debtor, or the debtor should accept creation of the security in writing.

Financial instruments and cashCan security be granted over financial instruments? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes – shares (equity stock of a joint stock company) and quotas (equity stock of a limited liability company, which is not a financial instrument) may be pledged to secure bank loan financings. The pledge must be granted in writing (notarial deed) and the pledged assets should be delivered to the pledgee (or a custodian) for security purposes.

Can security be granted over cash deposits? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes – cash deposits held in bank accounts can be pledged. The pledge must be granted in writing and the pledge must be notified to the relevant account bank.

Intellectual propertyCan security be granted over intellectual property? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes – IP rights can be pledged. The pledge must be granted in writing (notarial deed) and the pledge must be registered in the relevant register kept by the Italian Patents and Trademarks Office.

Enforcement

Criteria for enforcementWhat are the common enforcement triggers for loans, guarantees and security documents?
Assuming that the debtor is solvent, following an event of default the loan is usually accelerated and the secured creditors are entitled to enforce any security. Events of default are usually negotiated in the loan documentation, but generally follow Loan Market Association standards.

Process for enforcementWhat are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?
Security must be enforced according to the applicable procedures for each security or collateral.

Mortgages are enforced through a lengthy court-administered enforcement procedure. There are no self-help rights for the secured creditor to take possession of the asset outside this procedure. The foreclosed asset can be sold, at the court’s discretion, either by allowing any interested party to present purchase offers or, if this procedure fails, by public auction. In both cases the value of the mortgaged real estate is determined by the court through information given by the parties or an estimate issued by an expert consultant, or both. Following the sale, the proceeds are distributed among all creditors in the enforcement procedure in accordance with the priority of their respective security.

The recently introduced conditional security assignment agreement (the ‘patto marciano’ agreement) may be enforced by the lender where:

three non-consecutive repayment instalments have been due and payable for more than nine months, where the instalments are to be repaid monthly;

one repayment instalment has been due and payable for more than nine months in any other case; or

any payment obligations have been due and payable for more than nine months, if no repayment instalments are set forth under the underlying facility agreement.

Upon the occurrence of any of the above, the collateral can be transferred to the secured creditor without applying to court or having to commence a public auction.

Pledges over moveable assets are enforced either through a court-supervised procedure (under the general rules relating to the seizure of personal property) or through a private enforcement procedure where the parties have agreed in the deed of pledge that the forced sale will be carried out directly by the secured creditor.

Pledges over receivables are enforced by the secured creditor either taking action seeking a forced sale of the receivables or collecting moneys directly from the debtor up to the amount of the secured creditor’s credits.

Pledges over cash deposits are irregular pledges under which ownership of the pledged asset is transferred to the secured creditor, so there is no need for the creditor to commence enforcement proceedings. The depository bank will be pre-authorised to distribute the credit balance in favour of the secured creditor on default, up to the amount of the outstanding secured obligations, with any excess being returned to the debtor.

Pledges over intellectual property are usually enforced through a court-supervised procedure.

Pledges over shares and quotas can be enforced by sale of the shares either through an authorised intermediary at their market price (provided that the relevant criteria and formalities are set out in the deed of pledge) or through a court-supervised procedure.

Ranking in insolvencyIn what order do creditors rank in case of the insolvency of a borrower?
Creditors have equal rights to be paid out of the estate of a debtor, subject to pre-emption rights provided under the law granted to holders of liens, mortgages and pledges. In an insolvency scenario, subject to certain exceptions, claims of unsecured creditors will therefore rank behind those of secured creditors.